AYX - Alteryx: I Am Cautious Of Their Growth Strategy

2023-03-15 23:16:41 ET

Summary

• Alteryx has shown tremendous growth with more than 50% growth in 2022.
• Under the surface it looks like a lot of this growth was fueled at the cost of debt and increasing SG&A.
• In the current environment, I would like to be cautious of this type of growth.

Premise

I have used Alteryx (AYX) and I think it's a great tool. It literally changed my life overnight. From hours and hours to working with Excel and its macros to getting the same work done in minutes it felt great. Its drag-and-drop interface was a pleasure to work with and the ability to integrate data from multiple sources made the data analysis process incredibly efficient and streamlined. This experience was many years ago. The company and its tools have come a long way since then. In addition to data preparation, blending, and analytics it also offers visualization and reports. While the business has grown tremendously, I am a little skeptical about how long its growth strategy can continue. The company has taken on a massive load of debt and the growth from last year came with a big increase in operating costs. So in my analysis, I would like to take a balanced view of their growth and what I would like to see before investing in the business.

Growth at a cost

Growth took a bit hit in 2020 and 2021 and this was primarily attributed to changes in their business model. There were also issues with slower customer growth and increased churn rate. However, 2022 saw a big rebound in their sales. Credit for this goes to their change in business strategy. Alteryx started focusing on larger enterprises with a top-down sales approach. They have also been expanding their capabilities through acquisitions . Its largest acquisition was Trifecta in 2022 which it bought for $400M. These acquisitions should also augment their growth going forward. But all of this growth comes at a cost.

Decreasing Operating Margins

I get suspicious of the quality of growth when it is accompanied by an increase in operating expenses. When I look at the operating margins (-30% in 2022) and specifically S&M as a percentage of revenues it becomes increasingly clear how growth was fueled in the last few years. It looks like the change in sales strategy did not come cheap.

Debt is becoming a concern

Against the total assets of $1.55B, it has $1.4B in liabilities. Goodwill makes a substantial portion of its assets at $0.45B.

For me, this is becoming a bigger warning flag. Acquisitions and growth are increasingly coming at the cost of debt and debt to equity ratio are at its highest levels since its inception.

1. Any write-down in goodwill is likely to turn equity negative. This would mean that the company owes more than what it has
2. Its cash on hand of $350M alleviates any short-term liquidity concerns but its debt-to-equity ratio is far above acceptable levels
3. Recently, it announced a debt offering of $450M which will potentially go towards repurchases or repayments of its outstanding convertible notes.

Why is this a sell?

The company is currently destroying shareholder value and there is little chance of this changing any time soon. Its ROE, ROA, and ROIC are at -21%, -140%, and -30% respectively. It can still grow but the scenarios under which this happens do not make me thrilled.

Scenario I

It wants to put up another impressive year and the way to achieve that is a bigger hit on margins. Profitability and cashflows decrease further. AYX stock continues to dilute.

Scenario II

It wants to grow and another way to achieve that is through debt. The company is already up to its neck in debt. How long can it continue to borrow before the market realizes that it's not sustainable?

The company is in a situation where any more growth comes at an increased cost and this cost will need to be borne by the shareholders in a big way.

Even after a more than 50% drop from its all-time highs the valuation still makes little sense. An argument can be made that its increased sales and the stock price drop have led to its Price to Sales dropping to its lowest levels but it has come at a cost of its Price-to-book value moving to its highest levels (which is what it precisely sacrificed for its growth).

When will the sell rating be reassessed?

An undeniable fact of using data analytics tools is the moat it provides. Taking Alteryx itself for example, once you start building and using the workflows, the whole thing is on autopilot. If you have to switch to a competing product then you have to rebuild everything all over again and generally, a lot of resistance is seen here. But if a competing product is provided by let's say Microsoft ( MSFT ) for example, at a fraction of the cost (made more attractive by bundling it with other products) the decision to switch becomes more attractive. I would like to see how Alteryx makes use of its recent acquisitions to deepen its moat and thus make the switching costs much higher. Indirectly, this would start affecting its financials and put it in a much better position.

Another factor I would like to consider for rerating is decreased valuations. If the stock drops much lower than its present levels, then its valuation becomes more attractive and there could be potential acquisition interest from a competitor. Its biggest strength is the customer base it has developed. As we have seen already, developing a customer base is no easy task and a buyer would see benefits here.

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